Loan Classification Practice in Commercial bank Essay

Loan Classification For a long period after liberation, the banking system of Bangladesh operated in an environment of directed lending, particularly to rarity sectors determined by the government, at administered rates of interest. The system of classifying non-performing loans was extremely lax in absence of a standardized loan classification procedure and specific time limits for loans to be classified. Generally, a long time was required for a loan to be identified as classified, and as such the provisioning requirement was less important.

This resulted in huge non-performing loans and banks had to operate with inadequate capital bases. Gradually, the country’s banking system reached a chronic state of insolvency and became virtually non-viable. The loans were usually classified by the lending bank whenever the bank had reasons to believe that the borrower would not be able to repay the loan. This judgment was made regardless of whether the loan was overdue or not. Banks by themselves formulated specific conditions for classification on a qualitative basis.

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This thesis report on Loan Classification Practice of immemorial bank Of Bangladesh has been assigned to me by Ms. Niagara Sultana, Lecturer, Department of Business Administration, Stamford University Bangladesh. In this regard I have studied a lot of topics & books regarding Loan Classification Practice and along with the study I also took advice and experience of some Accounting Lecturers and some Banker. During the study I have gathered a lot of knowledge about Loan Classification Practice of Bangladesh commercial bank. On the basis of those detailed research I have prepared those report and I have tried my best to clarify the assigned topic given to me. . 2.

Background of the study: The main purpose of this research process was to be acquainted with and realize about loan classification practice and provisioning system and different tools used in loan approval and appraisal process. This topic is very important in case of bank because loan is the heart of a bank and if the hearts become blockage then the bank will die. These blockages can happen by improper classification of loans and approval processes. In approval process there are lots of activities included such as risk analysis, given weight to the risk and calculation of total risk grading. By these processes the bad borrower are usually eliminated in the initial step. But some times these processes cannot provide the actual scenario and almost every bank have ban loans. For that reason loan classification and provisioning is very import.

Loan classification means giving each and every loan case a status like unclassified, doubtful or bad/loss through verification of borrower’s repayment performance on a particular date while provisioning means setting aside fund from the profit against possible loan loss. Therefore this is a vital and vast part of a bank. For this reason the practical work was done by me for 3 months period. From this, have gained experiences about practical and theoretical survey. Without practical orientation, it is somewhat difficult to grasp the core concept; so in order to enhance the understanding about the diet soft drinks in took help from different beverage companies’ website.

In today’s world academic education is not enough for a student to increase his confidence level and reach goal without having experiences with the outside world. In order to have idea and gain experience, the students of Business Administration, have to undertake project and thesis program at any kind of relevant topics. Through a thesis, it is also intended to provide students with additional confidence and further experiences to aid in career development. 1. 3. Methodology Of the study: For preparing the report the following methodology is adopted. This report is an exploratory and analytical one in nature. Most of the data has been collected from the secondary sources. 13. 1 Collection of data. This report is an exploratory and descriptive one in nature.

Among primary ND secondary source most of the data has been collected from the both primary and secondary sources. Primary so races of information: Face to face conversation with the bank officials. Face to face conversation with the clients. Secondary sources of information: Annual reports of South East Bank Limited, Premier Bank Limited, Grain Bank Limited and Bank Asia Limited. Different books and newspaper articles written on credit management system of the banks. Various publication of Bangladesh Bank Internet 1. 3. 2. Segregation of data Collected data were segregated from the source material for the purpose of repairing report. 1. 3. 3.

Processing of data Collected data were compiled and processed for the purpose of preparing the report. SPAS software is used to calculate the regression equation. Many type financial ratios are calculated using Spread sheet and a Case Study on Credit risk grading is done using Excel templates. 1. 3. 4. Presentation of data Collected data were compiled in charts and tables and presented in the body of the report for this purpose we use Bar Diagram, Pie chart and Trends graph. 1. 4. Objectives of the study: The major objectives of the study is analyze the loan classification and revision system so far prescribed by Bangladesh bank for the banking sector of Bangladesh and the tools and techniques used in loan approval and appraisal process.

In light to the broad objectives, the details objectives are as follows: ; To present an overview of banking sector of Bangladesh. ; To understand the loan classification and provisioning system. ; To see the status of classified loans with changes in classification system. ; To know the techniques of loan approval process and used of these process. ; To understand the theoretical aspect of quantifying credit risk. To evaluate the factors affecting the credit risks associated with lending. ; To understand the loan approval practices in Bangladesh. ; To know the loan and advances of commercial bank and its effect on the economic development of the country. ; To make some suggestions and recommendations and present a conclusion. 1. 4. 1 .

The study has been undertaken with the following objectives: To have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management, menacing in various sector and recovery, loan classification method and practices of South East Bank Limited, Premier Bank Limited , Bank Asia Limited and Grain Bank Limited. To identify the strength and weakness of premier bank in credit management To compare the existing credit policy of above mentioned banks with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh. To identify and suggest scopes of improvement in Loan Classification of SABLE.

PL, ABLE and BAL. TO get an overall idea about the performance of SABLE, PL, ABLE and BAL. . 5. Scope of the study: The study will cover the sample banks only. Data available from the advance department of the sample banks and Bangladesh bank are analyzed and classified. Other departments concerned are not taken into consideration. 1. 6. Limitation of the study: If there are some advantages of any work at the same time there will be some difficulties of that work also. But with these limitations people become successful, they achieve their desire goals. There are so many examples of that. So, no excuse should be given to hide the weaknesses of any given job.

But if there is hard work and full efforts behind it then people appreciate the whole work no body search the flaws. There are some limitations of this paper. But these limitations represent only the facts that really hampered the quality of report. Like this report focuses on loan and advance part of Premier Bank Ltd. , which is the most sensitive element of the bank so in some cases the bank authority hesitated to disclose important information to maintain the business secrecy. Publications Of these banks were not sufficient to collect the needed information. But they provided the required annual reports of the bank. But the main difficulty was to collect the information of other commercial bank to make the peer group average.

Because of the limitation of time it was not possible to collect data directly from the particular bank . As a full time service holder time constraint for collect massive data has led to a difficulty as well. The specific limitation of the study is that there may be some missing information. Every matter has got some limitation. So this is also not an exception. The limitations of this thesis report are been sated below: Due to time and cost restriction, the study is concentrated in selected areas. To continue study in such a vast are requires a big deal Of time. As had only three month which is not enough. ; The major limitation of the study is that the data used are not confined to a particular source. It was difficult to communicate with varieties banks. ; Location of the study Overview of Banking Sector in Bangladesh. 2. 1. Definition of Bank: An institution, that acts as a financial intermediary by receiving money from depositors & lenders & also lending to borrowers. Whoever, being an individual firm, company or corporation generally deals in the business of money & credit are called a Bank. 2. 2. Purpose of Banking: The purpose of the Banking is to ensure transfer of money from surplus unit to deficit units. Bas in all countries work as the repository of money. The owners look for safety and amount of interest for their deposits with Bas.

Entrepreneurs try to obtain money from the Bas as working capital & for long- term investment. These entrepreneurs welcome effective & forward-looking advice for investment. Banking sector thus owe a great deal to the deposit elders on the one hand and the entrepreneurs on the others. They are expected to play the role of friend, philosopher, and guide for the deposit holders and the entrepreneurs. The opening of private and foreign participants to the Banking sector was intended to obtain desirable results from Banking. The authorization of private Bas was designed to create competition among the Bas & competition in the form of efficiency within and the productivity in enterprises funded by gas.